For-Sale Signs Sprout in Heartland

Ryan Downs sold 150 acres near Louisville, Neb., last month. The land's value rose sharply and he worried about potentially higher taxes next year.
Kent Sievers for The Wall Street Journal

By

Mark Peters And

Ian Berry

Updated Dec. 12, 2012 9:33 p.m. ET

With demand for farmland showing no signs of slowing, the market is welcoming the return of a missing element: supply.

Sales of land used to grow crops are surging, with owners capitalizing on a sustained rise in real-estate values driven by low interest rates and historically high prices for corn and soybeans. But the last straw for many prospective sellers has been Washington's continued fiscal confusion and the prospect of higher taxes next year.

That was the deciding factor for Judy Beetzel and her four siblings, who last month sold the family's 770-acre farm in central Illinois to a local farming family for $10,900 an acre, more than double the state average three years ago. The family had been renting the land to two local farmers, and Ms. Beetzel said they were going to continue that practice after her father's death in August. But plans changed after the family accountant estimated selling now could save as much as $500,000 in taxes.

My father "loved that land. But we know he would want us to do the best we could," said Ms. Beetzel, 61 years old.

The family joined a rush of sellers looking to capitalize on a marked rise in land prices that goes back several years, prompting debate over whether a bubble could be forming in the Farm Belt. But the sales don't represent farmers cashing out. In fact, just the opposite: Experts say most sellers aren't farming the land themselves, while most buyers are farmers looking to capitalize on long-term industry trends as well as scoop up land that may become available once in a generation.

Comprehensive data on farmland transactions aren't available, but more than half of real-estate professionals in a survey last month sponsored by Iowa State University reported a rise in farmland sales from a year ago, the highest number since it started asking the question in 1986.

Meanwhile, Farmers National Co., the largest auction firm in the Midwest, did a record 76 farmland auctions in October, seeing in recent months a 20% jump in the number of farms sold from a year ago, said Chief Executive Jim Farrell.

"It's just amazing the amount of farm sales that are going on right now," Iowa Gov. Terry Branstad said in an interview.

ENLARGE

Gov. Branstad, like other observers, attributes the recent flurry of transactions to nervousness about the "fiscal cliff," a combination of spending cuts and increases in federal taxes that could start to take affect Jan. 1. Starting next month, the federal tax rate on capital gains is set to climb to 20% from 15%, while a new 3.8% tax on capital gains that is part of the health-care overhaul law also takes effect. Additionally a key exemption for land passed from one generation to another will drop to $1 million from more than $5 million under current law.

But sellers would likely not be as anxious to pull the trigger if prices hadn't enjoyed such a steady march higher. Across a large section of the Great Plains, the value of farmland has risen 70% since the fourth quarter of 2009, according to data from the Federal Reserve Bank of Kansas City.

Ryan Downs said the likely increase in capital-gains taxes played into his decision to sell 150 acres outside of Omaha, Neb. last month. But he also questioned how much more prices could climb, with the value on his land jumping 130% over six years.

"I find it hard to believe it returning 20% every year," said Mr. Downs, chief executive of an Internet company in Omaha, who added that he doesn't foresee a collapse in prices.

Indeed, despite the new supply of properties for sale, there is little evidence of falling prices. The survey by Iowa State found the average value for an acre of cropland in Iowa jumped 24% from a year ago, to $8,296 an acre.

Many bankers and regulators anticipate price stability in part because many purchases continue to be made by farmers buying with cash to expand their operations—rather than by speculators with borrowed money. Even after this year's severe drought, many farmers have cash on hand from crop-insurance payments and record prices paid for the corn and soybeans they were able to harvest.

"There is a lot of cash in the market, and it's in farmers' hands," said Shawn Smeins, managing director at a subsidiary of Rabobank, which is based in the Netherlands and an active agricultural lender in the U.S.

He and other large lenders say they remain conservative, but bank regulators say they are watching. A memo from the Federal Reserve last fall warned that cropland values "may reflect overly optimistic long-term expectations."

Lenders have put in a number of controls "to prevent what we would call an overheated lending market," said Robert Coleman, chief examiner for the Farm Credit Administration, which regulates institutions accounting for more than a third of all lending in the rural U.S.

Brent Gloy, associate professor at Purdue University, warned that the market for cropland could be vulnerable in the event of either higher interest rates or lower farm incomes. In the near term, however, the biggest red flag would come if lenders come under growing pressure to make more loans. "The biggest concern to me is if we start to see a lot more credit in these transactions," he said.

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